Short-Circuited

May 1, 2007byHedda Schupak

Anyone who needs a lesson in stupid short-term thinking has only to read the news about Circuit City’s layoff of approximately 3,400 of its better-paid salespeople. With salaries ranging from $7.50 to $15 per hour (the average is about $10 to $11 per hour, according to a report on Bloomberg.com), they’re making too much money, and the company—facing larger competitors and declining sales, according to Associated Press reports—thinks it can do better by replacing them with lower-paid people.

The company claims these jobs were paid “well above” market value for those types of positions. Let’s examine the concept of “market value.” Circuit City’s chief executive officer, Philip Schoonover, earned $8.52 million in salary and stock in fiscal 2006, according to Bloomberg.com. Brad Anderson, the CEO of rival Best Buy earned $3.85 million. Circuit City’s market share is a distant second to Best Buy’s No. 1 position. So, why is its CEO earning more than twice that of the market leader? Isn’t that “well above” market value? Where’s that correction? And why is Schoonover rewarded for poor results?

While replacing experienced workers with $8-an-hour newbies will save a reported $110 million in the short term, I wonder how cutting those in the best position to help the company will solve its woes for the long term.

Wall Street rewarded this insanity! Circuit City’s stock jumped 35 cents the day the layoffs were announced. That’s a scary proposition, because it signals an ingrained American business philosophy based on short-term thinking without regard to long-term consequences. Even scarier is the thought that other retailers might follow suit if this seems to have even a modicum of success. Incidentally, Circuit City didn’t lose money in the last fiscal year—sales grew 8 percent, off 2 percent from its forecast of 10 percent growth. Comparable store sales, a key measure for any retailer, grew 6 percent, off from a predicted 8 percent. I daresay some of the bigger jewelry chains would be quite satisfied with a 6 percent year-over-year increase.

What kind of logic is this? In today’s retail environment, the shopping experience is usually what makes the difference between a retailer going gangbusters or going out of business. If you compete on price alone, you may as well quit now, because Wal-Mart will beat you every time. In fact, price wars were one of the reasons for Circuit City’s lower-than-expected sales—the company, along with Best Buy, had to drop prices on flat-panel TVs last Christmas to meet Costco, Home Depot, and Wal-Mart. So, if you can’t compete on price, that leaves selection, service, and shopping experience, and if you expect those to be your calling card, you don’t get there by scrimping on employees.

One might argue that if sales are slumping, then employees are underperforming. That could be true. So institute performance-based compensation plans and rigorous improvement goals—and part ways with those who don’t measure up. Oddly enough, Circuit City used to have commission-based sales compensation, which it scrapped in 2003 in response to a similar move at Best Buy. That move had “a dramatically negative impact on sales,” wrote Colin McGranahan, an analyst at Sanford Bernstein & Co., in the Bloomberg report.

Analysts also have questioned the time it will take to train the new hires and get them up to speed (“I’m guessing it’s not going to be a one- or two-quarter challenge. There’s going to be a learning curve,” said one) and the effect of the firings on morale.

This isn’t rocket science. Of course morale will suffer. Of course the new salespeople won’t have the training and knowledge needed to offer good customer service. Then again, maybe Circuit City won’t bother with the expense of training them; they’ll just keep wondering why nobody wants to shop there.

Finally, while Wall Street may reward such a bold move, the negative publicity could generate a consumer backlash. In a market where more shoppers are socially conscious about the products they buy and insist on fair trade rules for everything from diamonds to coffee, it wouldn’t be surprising if they react poorly to this news, especially when it affects their friends and neighbors—and may set a precedent that could someday affect their own jobs.

Despite my reputation as a shopping goddess, I don’t buy many electronics. But on the rare occasions that I do, I already prefer Best Buy to Circuit City. After this, I can’t think of anything that could change my mind.